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Inflation down, but interest rates should go up - IoD

16 Sep 2015

Commenting on inflation figures released today which showed inflation running at 0.0% on the Consumer Prices Index, Michael Martins, Economic Analyst at the Institute of Directors said:

“Inflation remains stubbornly low as the price of essentials – food and fuel – continues to fall. This will be of little concern for the vast majority of British businesses who may now have more spare cash to invest. Over the next few years this could help drive much-needed productivity increases, as firms buy or upgrade equipment, machinery, and technology – decisions they delayed during the early stages of the recovery.

“For households, a temporary period of low inflation is boosting spending power and increasing demand. Real wage rises, which remained so elusive during the downturn, are coming through across the private sector and look set to remain a feature of the recovery. Combined with low unemployment, one of the highest levels of vacancies since 2001, and strong domestic growth, the UK economy continues to look healthy. This is despite economic uncertainty and shaky confidence in some of the UK’s largest trading partners, notably China and the Eurozone.

“Therefore, the Bank of England must not let today’s figures stand in the way of normalising interest rates. Their mandate is to target inflation over a two-year period, where it is set to return to a more typical level. Moreover, the drivers of low inflation are outside of their control. Given the strength of the UK economy, pickup in output, tightening labour market, and tentative signs of productivity increases, the Bank of England must be prepared to follow the Federal Reserve if it raises rates on Thursday.”